Euro Recovers Amid French Election Shock, Dollar Softens

The euro steadied after overnight losses caused by France's election projections of a hung parliament. The dollar remained weak due to softer U.S. payroll data, increasing expectations for the Federal Reserve to cut interest rates soon. Sterling surged to a recent high versus the dollar and euro.

The euro stabilized on Monday, rebounding from overnight losses prompted by projections from France's election indicating a hung parliament, while the dollar continued to remain weak. The greenback has been on the back foot since the release of soft U.S. payroll data on Friday, which heightened expectations for the Federal Reserve to commence cutting interest rates soon.

Meanwhile, sterling climbed to its highest in three and a half weeks against both the dollar and the euro, extending gains from the Labour Party's landslide election victory last week that ended 14 years of Conservative governance. The Australian dollar also took advantage of the weak greenback to reach a six-month peak.

The yen managed to stay above last week's near 38-year low to the dollar but retreated from the day's highs. The euro held steady at $1.0828 after slipping as much as 0.4% earlier, as investors digested the implications of a hung French parliament.

The election projections featured several surprises, including a likely first-place finish for the leftist New Popular Front (NFP) alliance, and a third-place showing for Marine Le Pen's nationalist National Rally (RN), which had been leading before Sunday's vote. Forecasts suggested the left would secure between 184 and 198 seats, short of the 289 needed for an absolute majority, with President Macron's centrist alliance expected to get 160 to 169 seats and the RN and its allies 135 to 143 seats.

Ken Cheung, director of FX strategy at Mizuho Securities, remarked that while the immediate shock of a far-right majority was avoided, the rise of left-wing parties and growing political uncertainties could spell concerns over French fiscal deficits and euro zone stability in the medium term.

The euro also weakened slightly against the Swiss franc, an early haven amid investor worries about potential euro zone instability from France's political situation. The single currency was down 0.1% at 0.9702 francs, its lowest in a week, but remained close to last week's one-month high.

Nomura senior macroeconomist Andrzej Szczepaniak offered reassurance, stating that these election results are unlikely to have a lasting negative impact since there will be no significant changes in the National Assembly's political balance. Szczepaniak added that the euro/Swiss franc would likely move towards parity over the summer. The dollar index, which measures the U.S. currency against six major rivals, was flat at 104.95, stabilizing after a nearly 1% drop last week, due in part to Friday's softer U.S. jobs data.

According to the CME Group's FedWatch Tool, traders currently place about 76% odds on a rate cut at the Fed's September meeting, up from 64% the previous week, with a subsequent cut anticipated by December. The dollar was last up 0.1% at 160.93 yen, remaining below last week's high of 161.96.

Sterling edged up 0.1% to $1.2825, its best level since June 12. The Australian dollar fell 0.1% to $0.6741 after reaching as high as $0.67615 earlier, marking its first peak since January 4, as the risk of another central bank rate hike contrasted with increasing expectations for a near-term rate cut by the U.S. Federal Reserve.

(With inputs from agencies.)